China’s cashless society

In one of the most interesting episodes of the Masters of Scale podcast by Reid Hoffman – LinkedIn’s co-founder – the question asked and answered is “Where will the next Silicon Valley be?” Hoffman goes on to answer that Silicon Valley can occur wherever the conditions are right (nice political answer there) but goes on to say that currently the conditions are already there in China.

Which makes this New York Times article on how “in urban China hardly anyone is using cash anymore” even more interesting than it already is.

Size of the market

China is not just a run of the mill domestic market which one could compare with a decent sized EU country or US state. On the contrary:

”In 2016, China’s mobile payments hit $5.5 trillion, roughly 50 times the size of America’s $112 billion market, according to consulting firm iResearch.”

Such a market is a significant payment market, a market payment providers cannot ignore. Local solutions are growing and are scaling at a rapid pace:

“according to recent data, Ant Financial and Tencent were set to surpass the likes of Visa and Mastercard in total transactions per day in the coming year.”

Ubiquitous presence

And the cashless innovation is literally everywhere. Almost no-one pays with cash anymore.

“Enterprising musicians playing on the streets of a number of Chinese cities have put up boards with QR codes so that passers-by can simply transfer them tips directly.” … “Literally every business and brand in China is plugged into this ecosystem.”

And China has skipped the card almost entirely.

“One friend didn’t realize how reliant she had become on mobile payments until her bank called her. She had left her A.T.M. card in the machine three weeks earlier and had not noticed its absence.”

Simple innovation

This evolution, in a context where simple solutions are the norm because of the average income which remains low in urban China, leads to simple innovation … perhaps still the best innovation as it does not require a significant set-up:

”The key is that both companies are able to provide payments on the cheap, partly by allowing smaller vendors to make use of a simple printout of a QR code or their phone, instead of an expensive card reader. A back-end system that stores a record of user accounts, instead of having to communicate with a bank, also keeps costs down.”

Key conclusions

  • Innovation is happening at a very fast pace in China, not necessarily in the business hubs, but in urban areas as well;
  • Innovative solutions are often simple solutions;
  • China has no use for card systems. This is an evolutionary step which is bypassed almost entirely. By the way, in Europe we have such a hard time letting go of cards that we even have a “contactless” card, which is a card you don’t use. Go figure;
  • Controlling the back-end of the system will be key, as will be the links between the systems;
  • Mobile companies are becoming banks. Banks are becoming mobile companies. Voucher companies have long managed the back-end and the integrations and move beyond the traditional models.

What a great time to live in.